Financial Planning for May, 2011

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Long-term Care Crisis: Are You Prepared?

Individuals and families need solutions to help cope with a long-term care crisis that, according to experts, has been in the making for decades. Its long-anticipated arrival has been hastened by an economic downturn, burgeoning healthcare costs, ballooning federal and state budget deficits and the inevitable aging of millions of baby boomers.

According to the National Center for Health Statistics, by 2030 more than 70 million Americans will be at least 65 years old, increasing from the current 2 percent to a whopping 20 percent of the population. As the geriatric pendulum swings and the demand for long-term care increases, the tax base shrinks and the costs and risks for private insurance carriers swell, making long-term care insurance more expensive and less predictable for consumers.

The Long-Term Care Funding Gap
The Congressional Budget Office estimates that as many as 9 percent of retirees will need more than five years of care in a nursing home and nearly one quarter of retiring Americans will eventually face more than a year in a nursing center. Currently, an estimated 15 million people care for victims of Alzheimer’s disease. While many Americans plan for high medical costs by obtaining health insurance, they often fail to plan for the costs of a nursing home or in-home eldercare.

Only a small percentage of Americans have the financial wherewithal to fund their own long-term care, either with cash or by selling assets. The obvious solution to preparing for it is to buy long-term care insurance; but more than 90 percent of Americans are not insured. Some people can’t afford it, some simply put it off because they’re still young and others don’t want to think about it. The result is that many people never get around to dealing with planning for long-term care, or find that they waited too long and can’t qualify once they attempt to purchase the insurance.

Healthy Premiums
If navigating through the crisis were as simple as getting people to buy long-term care insurance, the hard edges of the crisis might be softened. But with many insurance companies such as MetLife and John Hancock raising premiums – or dropping the policies altogether – long-term care insurance might no longer be a viable solution. Why are costs for long-term care insurance rising? Simply put, carriers must balance the number of policyholders who pay premiums and use few if any benefits with those who pay premiums and use more benefits. Although people are living longer, many will eventually still need long-term care, and that care might need to last even longer than in the past. With many people opting not to buy long-term care insurance, the carriers are struggling to achieve the level of sales volume required to keep premium costs down.

Additionally, due to stock market declines after the financial crisis, the premiums invested by insurance companies have realized lower returns, meaning the companies must raise rates to make up the difference. This same market downturn can also influence prices, since investors in publicly traded insurance firms expect them to be profitable.

The Medicaid Problem
Medicaid, enacted in 1965, was designed to create a partnership between states and the federal government to provide medical care and disability assistance for low-income people and long-term care for the low-income elderly. Middle-income seniors, however, are caught in the middle, unable to meet the requirements for Medicaid yet not being able to afford the premiums to self-insure. These seniors sometimes intentionally deplete their financial resources, bankrupting themselves and leaving nothing to their children in order to qualify for assistance with nursing home care.
Most likely, Medicaid will be available in some form for those baby boomers who qualify, but given the imminent need for budget deficit and national debt reduction, the program’s future cannot be considered a certainty.

What Are The Options?
If you’re like most Americans, you don’t have the assets to sell and you can’t afford to pay out-of-pocket for long-term care, which can run into hundreds of thousands of dollars above anticipated retirement costs. So what can you do?

Long-term care insurance in some form is still the best private option, according to experts, but buyers must choose their plan and their carrier carefully.

  • If you already have a policy, you can simply find a way to keep pace with the rising premium costs.
  • Wealthier people, who want to leave their heirs more money, might consider a hybrid policy, which allows the buyer to combine a life insurance policy and a long-term care policy. Hybrid policies require substantial lump sum investments, so these plans are not widely affordable. As an alternative, it might be better to simply invest the money in another vehicle and use the return on investment to buy separate life and long-term care policies.
  • Other options might include buying less coverage with the opportunity to add to the policy later, asking the insurance company to lower your benefits to keep your premium lower; or buying a temporary policy that lasts only long enough for you to establish the resources to pay for your own care.
  • Many states offer partnership incentive programs that allow insured people who lack the money to pay for their own care to shelter part of their assets if they run out of private insurance benefits and must eventually rely on Medicaid to pay for the rest.

Don’t Plan Without Advice
The price and complexity, as well as the emotional and social aspects involved, make long-term care funding and insurance options best navigated with the help of an expert. Before investing your money in a long-term care funding plan, talk to your financial adviser.


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